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Annual Report 2009 Year Ended March 31, 2009 Bringing Smiles to Everyone Corporate Data (As of March 31, 2009) Corporate Philosophy Directory Bringing smiles to everyone Kaken helps improve the quality of life for patients. not only responds to changes in the times but also innovates and remakes itself. Looking to create new drugs that are competitive on the global market, we will build Kaken into a company that makes our employees proud by providing much-needed, high-quality pharmaceuticals. Kaken strives to advance to the 21st century as a company that maintains a strong presence and fulfills its obligations to society as a pharmaceutical company. Contents The origin of Kaken Pharmaceutical Co., Ltd. can be traced back to the President’s Message 02 Institute of Physical and Chemical Research (Riken), established in Developing New Products 04 1917. The Company started pharmaceutical business with full-scale Overview of Major Products 06 Commitment and Excellence 10 Fulfilling Our Social Responsibilities 12 Board of Directors and Corporate Auditors 14 Financial Section 15 Corporate Data 35 and drug development activities through merger and alliance. Kaken’s prestige has soared accordingly. While the Company has established strength in developing and selling pharmaceuticals for orthopedics, it is now expanding its involvement in other medical fields, such as dermatology. The Company contributes to improving people’s health by cultivating its own original technologies, engaging in joint development initiatives, introducing new technologies and acquiring marketing rights. As a fruit of its technology and product introduction, the Company has been since June 2001 marketing Fiblast Spray consisting of Trafermin, a recombinant form of human basic Fibroblast Growth Factor (bFGF) for the first time in the world, licensed from a U.S. bio-pharmaceutical company, Scios, in the area of regenerative medicine (wound healing medicine). patients. Incorporated We strive to create and offer March 1948that satisfy the effective drugs needs of patients and medical professionals. Paid-in Capital ¥23,853 million Global Business Development Executive Director & General Manager Masao Ishida Creating joy as Tel: 81-3-5977-5046 a company. Fax: 81-3-5977-5133 E-mail: [email protected] recognize our social To continue realizing our corporate philosophy of “bringing smiles to everyone,” it is essential that Kaken technologies in 1948, and since then broadened the scope of its business Founded Creating joy for March 1917 KAKEN to their faces, through supplying superior pharmaceuticals, development of penicillin and streptomycin based on Riken’s own Company Information REGISTERED HEAD OFFICE 28-8, Honkomagome 2-chome, Bunkyo-ku, Tokyo 113-8650, Japan Tel: 81-3-5977-5001 conducts business by Fax: 81-3-5977-5131 http://www.kaken.co.jp By serving as many people as possible to return smiles of happiness Profile Business Philosophy: Three Joys Main Branches Sapporo Branch Sendai Branch Tokyo-1 Branch Tokyo-2 Branch Nagoya Branch Osaka-1 Branch Osaka-2 Branch Consolidated Hiroshima Branch Fukuoka Branch Administration: 118 Sales & Marketing: 991 Production & Technology: 252 Research & Development: 293 Regulatory Affairs: 35 Financial Highlights Thousands of U.S. dollars (Note) Millions of yen 2008 2009 ¥82,930 ¥79,934 $846,224 Operating income Net Research income Laboratories Shizuoka Research Laboratories Kyoto At March 31,Research Laboratories Production Technology Laboratories Total net assets 10,629 9,842 108,459 5,579 5,106 56,929 56,679 57,447 578,357 TotalOverseas assets Office: Kaken New York Office Per share data: Avenue, 24th Floor, New York, NY10167 245 Park 1-212-372-8910 Net Tel: income (Basic) Fax: 1-212-372-8970 Cash dividends (Non-Consolidated) E-mail: [email protected] 94,504 93,856 964,327 For the years ended March 31, Plant Net Shizuoka sales Factory Ratios: This annual report contains forward-looking statements pertaining to the Company’s ROE information and trends. Actual results may differ from expectations due to unforeseen company with vitality and presence whose employees enjoy Employees (Non-Consolidated) and take pride in their work. 2009 Forward-Looking Statements business and prospects. These statements are based on current analysis of existing responsibility as a pharmaceutical company with a high ethical standard and society’s trust. Common Stock Creating joy for Authorized: 360,000,000 shares our employees. Issued: 101,879,461 shares (As of Aug. 31, 2009) Our objective to become a 14,281 (As of Mar. 31, 2009) Number of isShareholders: Capital adequacy ratio Yen U.S. dollars (Note) ¥ 55.61 ¥ 48.35 $ 0.567 26.00 20.00 0.265 9.78 8.66 — 59.98 61.21 — % risks and uncertainties. Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥98 = $1 effective on March 31, 2009. 35 Business Philosophy: Three Joys Creating joy for patients. KAKEN conducts business by We strive to create and offer effective drugs that satisfy the needs of patients and medical professionals. Creating joy as a company. Creating joy for our employees. We recognize our social responsibility as a pharmaceutical company with a high ethical standard and society’s trust. Our objective is to become a company with vitality and presence whose employees enjoy and take pride in their work. Consolidated Financial Highlights Thousands of U.S. dollars (Note) Millions of yen 2009 2008 2009 ¥82,930 ¥79,934 $846,224 10,629 9,842 108,459 5,579 5,106 56,929 Total net assets 56,679 57,447 578,357 Total assets 94,504 93,856 964,327 For the years ended March 31, Net sales Operating income Net income At March 31, Per share data: Net income (Basic) Cash dividends (Non-Consolidated) Yen ¥ 55.61 ¥ 48.35 26.00 20.00 0.265 Capital adequacy ratio $ 0.567 9.78 8.66 — 59.98 61.21 — % Ratios: ROE U.S. dollars (Note) Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥98 = $1 effective on March 31, 2009. 1 President’s Message As a medium-sized pharmaceutical group with management grew 8.0%, to ¥10,629 million. Net income expanded 9.3%, to that facilitates flexible response to changes, we continued to ¥10,629 million, despite losses on sales and devaluation of enhance our corporate quality and strove to develop and investment securities. supply effective pharmaceuticals. We also actively pursued the generic drug business as one pillar of our operations. Addressing Future Challenges for Continued Growth Ongoing government initiatives to curb healthcare spending are Upholding its corporate philosophy of “bringing smiles to everyone,” the Kaken Group aims to provide superior raising the level of competition within the pharmaceutical pharmaceuticals that improve patients’ quality of life. To industry. The Kaken Group considers this situation an opportu- guide our corporate actions to meet shareholders’ objectives, nity. We aim to maximize corporate value by steadily raising we have formulated three basic policies for management. awareness and implementing operational reforms, as well as Through these policies, we seek to maximize corporate value maintaining our status as a trusted company in the eyes of to earn the trust and expectations of all our stakeholders. society through a strong commitment to compliance. Our five The three polices are as follows. key reforms are outlined below. 1. Discover, manufacture and supply useful pharmaceuticals Focus investments on research and development that meet the needs of patients and the medical community. 2. Remaining conscious of our social responsibilities as a We are striving to concentrate our investment in and raise the efficiency of our research and development to expand the pharmaceutical company, conduct corporate activities in a product pipeline. At the same time, we will continue to actively highly principled manner, and aim to be a company that pursue strategic alliances with domestic and overseas companies is trusted by society. and research institutions, and introduce new research programs. 3. Strive to create an energetic atmosphere in which employees can enjoy and take pride in their work. To speed up research and development, we will outsource basic research procedures, make use of contract research organizations (CROs) and conduct overseas and joint international clinical trials. Overview of Results for the Fiscal Year Ended March 31, 2009 Although the Japanese economy went into recession, its impact development of new drugs, to raise our level of contribution to on the pharmaceutical industry was relatively slight. On the people throughout the world. We will also endeavor to maximize new research and other hand, Japan’s National Health Insurance system introduced medical cost restraints, including drug price revisions that Strengthen our sales force went into effect in April 2008, promoting the use of generic We have developed a system to ensure that medical representa- drugs at medical institutions and dispensaries, and the doubling tives provide medical institutions with necessary information at of facilities applying the Diagnosis Procedure Combination the appropriate times. We will expand our market share to (DPC). Under these circumstances, the Group endeavored to ensure our strong position in the field of orthopedics. We are meet the needs of medical professionals in the field by providing also actively pursuing the generic drug business as one pillar of information. our operations. We are augmenting the information we provide by utilizing product-related websites and the mass media. As a result of these efforts, we maintained growth in profits for the seventh consecutive year, with net sales and operating 2 income reaching historic highs. Owing to steady increases in Establish an internal control system and carefully manage risk sales of mainstay products, consolidated net sales rose 3.7% We are reinforcing our internal control system to achieve four during the year, to ¥82,930 million. Owing to successful efforts objectives: higher operating effectiveness and efficiency, reliable to use selling, general and administrative expenses more ef- financial reporting, compliance in our business activities and ficiently, the operating margin improved and operating income security of assets. Optimize and streamline operations On the production side, we will make further reassessments of procedures, products and standards as we strive to lower manufacturing costs. In the field of agrochemicals, we are expanding consigned production to overseas companies and we remain committed to obtaining FDA certification. Moreover, we are outsourcing our distribution center business and we will continue to promote cost reductions. Promote Environmental Protection Kaken’s Shizuoka production and R&D facilities have obtained ISO 14001 certification, and our Kyoto research laboratories have been awarded the Kyoto Environmental System certification by the city of Kyoto in recognition of their environmental management systems. We recognize environmental protection as a social responsibility, and to this end we are aggressively promoting activities at all levels of our organization. For example, we have established an Environment Committee and set up Environment Task Forces at each worksite, and we carefully comply with the During the year, Kaken cancelled ¥11,141 million in treasury revised Law Concerning the Rational Use of Energy. These stock and acquired an additional ¥2,821 million in the market activities are summarized in our Social and Environmental on this basis. Report on the Kaken website. Basic Policy and Approach concerning Return to Shareholders value through targeted investment in research and development Kaken considers long-term, comprehensive profit increases for and in improvements to business infrastructure. Retained earnings are appropriated to optimize corporate its shareholders an important management goal. Operating in the pharmaceutical industry entails large risks, requiring us to Target Management Indicators and Long-Term have a higher level of equity capital than companies in other Business Strategy industries. We employ a flexible dividend policy that sets cash The Kaken Group’s medium- to long-term numerical targets for dividends based on performance while maintaining a balance future growth comprise consolidated operating income of ¥15 between returns to shareholders and strengthening equity billion and return on equity (ROE) of 12% or more. In the capital. future, we will endeavor to optimize the value of each division and establish a base that ensures our survival as a business that Dividends per share of common stock applicable to the fiscal year under review consisted of a ¥13.00 interim dividend maintains a strong presence in the 21st century. and a ¥13.00 year-end dividend—each ¥3.00 higher than in the previous year, resulting in total dividends for the year of ¥26.00 June 2009 per share. This amount is ¥6.00 higher than for the preceding fiscal year, making fiscal year 2008 our seventh consecutive year of dividend increases and raising our payout ratio to 46.8%. Kaken also implements a flexible system of acquisition of treasury stock through resolutions by the Board of Directors to Shiro Inui facilitate response to changes in the business environment. President 3 SPECIAL FEATURE Kaken’s Innovative Product for Regeneration Fiblast Spray—the world’s first regenerative medicine—is the commercialized product of a human recombinant protein basic Fibroblast Growth Factor (bFGF). bFGF, a member of the FGF family that exists endogenously in almost all tissues and binds to the extracellular matrix, is released from the matrix once cells or tissues are damaged, such as by trauma or ischemia, after which bFGF acts on a variety of cells and tissues to promote regeneration. As the drug’s actions are broad-ranging, it is characterized by its powerful ability to stimulate not only the proliferation of numerous cell types, but also the formation of new blood vessels. After obtaining exclusive licensing rights in Asia in 1988 from Scios Inc. of the United States, Kaken made continued R&D efforts toward approval of the drug for the treatment of pressure ulcer and other skin ulcers (burns and leg ulcers), releasing the product onto the market for the first time as Fiblast Spray in June 2001. After more than eight years on the market as a wound healing agent, the drug has a solid reputation in numerous hospitals and clinics in Japan. bFGF has also been found to promote the proliferation and regeneration of peri- odontal and bone tissues, in addition to skin tissue. In dentistry, its effectiveness has been proven in the regeneration of alveolar bone, as well as to the regeneration of periodontal ligament and cementum. We have completed two Phase II clinical trials in periodontitis patients to confirm the dose-dependent effects on the regeneration of destroyed alveolar bone, 4 New Drug Development Pipeline Product Indication Stage Launch (CY) Remarks PIII 2012 bFGF PII Finished 2014 bFGF Next stage of clinical trials under consideration 1 KCB-1D Periodontitis 2 KCB-1B Bone fractures 3 KP-102LN Short stature PII 2014 For growth hormone deficiency 4 TRK-100STP Lumbar spinal canal stenosis PII 2016 Developed jointly with Toray; New indication for sustained-release formulation of beraprost sodium 5 KP-496NS Allergic Rhinitis PII 2014 Nasal spray 6 KP-103 Onychomycosis PI 2012 Topical formulation; Licensed to Dow Pharmaceutical Sciences Inc.; PII in U.S.A. 7 KP-413 Atopic dermatitis Topical formulation; PI/ PII in U.S.A. and also to identify the optimal dose for Phase III. Currently, Phase III trial is proceeding as scheduled, and we expect to obtain marketing approval in 2012. We are conducting basic research with the prospect of expansion into areas of dentistry beyond periodontitis, including implant applications. For bone tissue, bFGF has demonstrated the ability to promote fracture repairs by en- hancing bone metabolism through both the direct proliferative effect on osteoblasts and the indirect accelerative effect on osteoclasts. We recently completed Phase II clinical trials on patients with tibial shaft fractures, and we are in the process of setting our next objective. In addition to the areas in which we are conducting clinical trials, we are also currently collaborating with universities and other research organizations in Japan in broad-ranging areas to expand the possibilities of bFGF-based regenerative medicines. In March 2005, we obtained worldwide rights to develop, manufacture and market bFGF. That same year in December, we concluded a license agreement with a Chinese pharmaceutical company for the development and marketing of Fiblast Spray. In June 2007, we concluded a license agreement with Sunstar Inc. involving the development and marketing in Europe and North America in the dental area. Utilizing the technologies and know-how accumulated through our research and develop- ment efforts toward bFGF, we continue to collaborate with our overseas partners to expand our global activities. 5 Overview of Major Products 6 Artz (sodium hyaluronate) Artz is an anti-osteoarthritis with highly purified sodium hyaluronate Pharmaceuticals and Medical Devices as the active ingredient. Hyaluronic acid is extracted from rooster combs and has viscoelastic, waterretentive and lubricating properties. In 1987, Artz was released for the first time, indicated for osteoarthritis of the knee as a form of hyaluronic acid injectable into the joint, obtaining additional approval for the treatment of shoulder periarthritis in 1989. Artz (Sodium hyaluronate) In 1992, Artz Dispo—a packaging of the drug with a disposable syringe—was released with the aim of making injection procedures simpler and faster, as well as reducing the danger of infections. In 2005, the drug was approved for the treatment of knee joint pain accompanying chronic rheumatoid arthritis. Procylin (oral prostaglandin I2 analog) Procylin is a prostaglandin I2 analog, beraprost sodium, as its active ingredient, which dilates blood vessels and inhibits platelet aggregation, serving as a treatment for chronic artery occlusive disease. This drug was created by Toray Industries, Inc. and commercialized through joint clinical development with Kaken. It is the only oral prostaglandin I2 analog formulation in the world. Procylin is a superior circulation enhancer with its ability to inhibit platelet aggregation and increase peripheral blood flow. The drug was launched in 1992 for its effectiveness in treating Procylin (oral prostaglandin I2 analog) ulcers, pain and chills resulting from such conditions as arteriosclerosis obliterans (ASO) and thromboangitis obliterans (TAO). In 1999 Procylin received additional approval for primary pulmonary hypertension. Adofeed (pain- and inflammation-relieving plaster) Adofeed is an antiphlogistic analgetic plaster containing Flurbiprofen as its active ingredient, which is a non-steroidal anti-inflammatory drug that acts as a powerful prostaglandin biosynthesis inhibitor. Absorbed directly through the skin, Adofeed has proven effective in reducing pain and inflammation associated with osteoarthritis, shoulder periarthritis, tennis elbow, muscle pain and other inflammatory diseases. In October 2008, we began selling products that are twice the size of previous offerings. This enhanced lineup gives patients more range in selecting products that are sized correctly for their use. Mentax (anti-trichophyton agent) Adofeed (pain- and inflammation-relieving plaster) Mentax is a topical treatment for superficial mycosis with butenafin hydrochloride—created by Kaken—as its main ingredient. Mentax is marketed worldwide, including in the United States through Mylan Pharmaceuticals. In December 2001, Mentax was approved as an over-the-counter (OTC) drug in the United States and is now marketed under the trade name Lotrimin Ultra through Schering-Plough Corporation. In 2003, Mentax was approved for manufacture and sale as an OTC drug in Japan, and is currently being marketed as an OTC drug by Takeda Pharmaceutical Company Limited and Sato Pharmaceutical Co., Ltd. In 2004, we launched a new spray formulation of Mentax. Mentax (anti-trichophyton agent) 7 Lipidil (anti-hyperlipidemia) This new micronized formulation of the active ingredient Fenofibrate in the drug Lipantil—released in 1999—is a fibrate type of lipid-lowering agent with increased absorbability. Fenofibrate is a fibrate compound developed by Fournier Pharma (now Solvay S.A.) in France. The drug improves overall lipid metabolism by activating peroxisome proliferatoractivated Lipidil (anti-hyperlipidemia) receptor a (PPARa) in liver cells and lowering triglycerides and cholesterol while increasing HDLcholesterol by adjusting the expression of a variety of proteins involved in lipid metabolism. Lipidil is sold in over 90 countries and has accumulated extensive clinical experience. Seprafilm (synthetic-absorbent anti-adhesive barrier) Seprafilm is a sheet-type, synthetic-absorbent and anti-adhesive medical device developed by Gen zyme Corp. in the United States, consisting of sodium hyaluronate and Carboxymethylcellulose. Within 24 to 48 hours after applying Seprafilm to tissues damaged by surgery, the product becomes a hydrated gel and remains in place for approximately seven days, acting as an effective anti-adhesive by creating a physical barrier between damaged tissue and the surrounding normal tissue. Seprafilm is available in three types of package, for selection according to use. Seprafilm (synthetic-absorbent anti-adhesive barrier) Fiblast Spray (wound healing agent) Consisting of Trafermin, a recombinant form of human basic Fibroblast Growth Factor (bFGF), Fiblast Spray is a wound healing promotor having effects of angiogenesis and granulation formation. Scios Inc. paved the way for the development of recombinant bFGF by mapping the complete DNA sequence of the human bFGF gene. Kaken then took over development of the drug, releasing Fiblast Spray as the world’s first human bFGF agent in 2001. Ebrantil (treatment for dysuria and the 1-selective hypertension) Ebrantil is a sustained-release formulation of the 1-selective blocker, Urapidil. In Japan, the drug was first marketed in 1989 as a treatment drug for hypertension, based on its Fiblast Spray (wound healing agent) peripheral vasodilating effect. In 1995 the treatment was approved for difficulty in urination caused by benign prostatic hyperplasia, and in 1999 it was approved as the world’s first 1-blocker for the treatment of dysuria caused by neurogenic bladder. Cytotec (NSAID-induced ulcer preventive drug) This drug is excellent at treating gastric and duodenal ulcers brought on by the administration of NSAIDs. The active ingredient, prostaglandin E1-analog Misoprostol, developed by G.D. Searle (now Pfizer, Inc.), both inhibits the secretion of gastric juices and exerts a mucosal protective effect (site protection). In the Guidelines for the Examination of Gastric Ulcers and Guidelines for the Treatment of Rheumatoid Arthritis in Japan, Cytotec is recommended as a drug backed by clinical evidence for the prevention and treatment of NSAID-induced ulcers. Generic Drugs In Japan, government authorities are currently urging the use of generics as part of a movement to reduce medical costs. We are also seeing an increase in frequency of generic drug use in actual medical practice. As the generic drug market grows, Kaken is making aggressive forays into generics to seize this business opportunity. 8 In addition to pharmaceuticals, medical devices, agrochemicals and animal health products, and real estate, we intend to build generics into the fifth pillar of our operations with a medium-term goal of ¥10 billion in sales. We will continue to expand our product line to achieve this objective. Berasus (oral prostaglandin I2 analog sustained-release formulation) In October 2007, Kaken gained manufacturing and sales authorization for Berasus, and launched the drug on the market the same year in December Berasus is a sustained-release formulation of beraprost sodium, a primary component of procylin, which was launched in 1992. Compared with procylin, it can be used as a treatment for pulmonary arterial hypertension (PAH) but with more stable blood concentrations and with the possibilities of reduced number of administrations and higher single doses. (Oral Prostaglandin I2 analog Sustained-Release Formulation) To date, there have been few effective drugs to combat PAH and Berasus is anticipated as a high-potential possible alternative. Clinical trials are currently underway that include lumbar spinal canal stenosis as a new indication. Polyoxins (fungicides) Two different technical grade active ingredients (TGAIs), Polyoxin AL and Polyoxin Z, are produced by fermentation using a microorganism Agrochemicals isolated from a soil of Mt. Aso in Japan. Formulations of WP, SG and WG are registered in various countries and used widely to control fungal diseases on fruit trees, vegetable, flowers, turf and ornamentals. As natural source fungicides, they are known to be highly safe for humans, animals, plants and the environment Pentoxazone (rice herbicide) Pentoxazone is known as a Protox inhibitor and used to control annual broad leaves, barnyard grass and monocholia in paddy fields with a long-lasting effect. GR, SC, TB and EW formulations of pentoxazone alone or in combination with sulfonylurea and other herbicidal compounds are available and can be applied before, during and after transplantation of rice seedlings due to their high crop safety. Salinomycin (ionophore anti-coccidial for chicken) Salinomycin was discovered and developed by Kaken and registered first in Japan in 1978. Through successful marketing and licensing, Agrochemicals salinomycin is now the best-selling anti-coccidial feed additive in the world and is instrumental in economically producing millions of tons of healthy chicken meat. Kaken produces salinomycin under GMP and supplies worldwide technical grade material and formulated products directly and through distributors. Colistin sulfate (polypeptide antibiotic) Colistin sulfate is used as a veterinary medicine or feed additive to control diseases caused by gram negative bacteria in poultry, swine, cattle and other animals. This antibiotic has been used worldwide for a long period of time because of its excellent safety and efficacy. 9 Commitment and Excellence 10 R&D Division seeks out and evaluates pharmacological activities of candidate Kaken’s drug discovery research focuses on such areas of compounds. The Pharmacology Laboratory verifies the utility of strength as inflammation, immunity and allergies, in addition to candidate compounds created through discovery research and its core competence of fungal infection disease. We invest compares them alongside other drugs. The Pharmacokinetics substantial financial and human resources into such research and Safety Research Laboratory verifies the safety of candidate activities with the aim of developing new drugs that are both compounds on animals and humans and assesses their ADME effective and safe. To create innovative drugs that can compete in vivo. The Drug Formulation Laboratory investigates the in the world market, we maintain an active program of drug physical and chemical properties of the drug compound and discovery research, spearheaded by outstanding research creates a production plan to ensure maximum safety and professionals and techniques refined over many years of effectiveness in the resulting drug’s action on the target disease. experience in pharmaceutical development. At present, we have a total of around 300 researchers. scientists received the 23rd Young Investigator Award from the During the year under review, we estimate that our research and American Society for Bone and Mineral Research (ASBMR)— development expenses came to ¥8.3 billion. To expedite our the most prestigious organization in the field— in recognition of R&D activities, we are actively pursuing strategic alliances with our research in osteoporosis. In 2003, Kaken’s scientists received companies and research institutes both in Japan and overseas, the Prize for the Most Outstanding Pharmacy Thesis from the including for offshore clinical development, as well as Academy of Pharmaceutical Science and Technology, Japan outsourcing some of our operations. (APSTJ) in the field of oral solid formulation design, and in 2009, we won the APSTJ Asahi Kasei Encouraging Prize for the Kaken is fully committed to R&D activities that generate As a result of our research activities, in 2001 Kaken’s innovative proprietary products, which will enable the development of Itraconazole. These awards underscore our high Company to build a unique position as a pharmaceutical level of basic technology. We are leveraging such research manufacturer. To enable efficient R&D activities, we adopt a technologies to accelerate and expand our R&D efforts. multifaceted approach that includes pinpointing specific research programs, in-house development, joint development, Gene Techno Science Co., Ltd. (GTS), a venture company of licensing and outsourcing. Hokkaido University, which grants exclusive worldwide rights to Kaken for development, manufacturing and marketing of the Our Drug Discovery Research Laboratories are located in During 2007, we concluded a licensing agreement with Kyoto, the ancient capital of Japan, and our Development anti-alpha-9 integrin antibody. Through such initiatives, we are Research Laboratories are in Shizuoka. We divide duties and pressing forward with the development of antibody drugs. employ cutting-edge research equipment and techniques to aid drug discovery and investigation, which require long and drug discovery and other areas, we will continue focusing on our arduous research and unrivalled expertise. At our Kyoto specialist areas and actively pursue alliances with research laboratory, we carry out discovery research, synthetic studies and institutions in Japan and overseas. We will also introduce and pharmacological studies, while at our Shizuoka laboratory we license new technologies on a global basis, seeking out new conduct studies on pharmacokinetics, drug safety and technologies and their seeds on a worldwide scale. As a part of formulation. our efforts to continue carrying out top-class research, respected researchers in Japan periodically discuss and advise on Kaken’s We advance R&D efforts through cooperation and Furthermore, to expedite discovery research in genomic coordination among five research sections. The Chemistry drug discovery programs. Laboratory handles synthesis of the compounds that are the seeds of new drugs. The Drug Discovery Research Laboratory drug candidates that have passed the non-clinical trials are In our R&D division, clinical trials are studies in which actually administered to humans. The Clinical Development Department verifies the efficacy of candidate compounds coming out of discovery research or from elsewhere and plans and performs clinical trials on those compounds. The Administration Department of Clinical Development oversees clinical trial quality and reliability and manages safety information for investigational drugs. These departments coordinate with the research laboratories to ensure speedy completion of clinical trials. R&D Division, obtaining drug approvals as well as registration Regulatory Affairs Division Kaken’s Regulatory Affairs Division consists of three in the drug price standards after approval. departments—the Quality Assurance Department, the Production Division Pharmacovigilance Department and the Regulatory Affairs Our production facilities in Shizuoka Prefecture were among Department. the first in the industry to incorporate factory automation The Regulatory Affairs Division shoulders Kaken’s systems. They comply with Japanese GMP, which stipulates responsibility as a pharmaceutical manufacturer and marketer, requirements for drug manufacturing and quality control. In making the final judgments on quality, effectiveness and safety addition to satisfying these requirements, the quality of products in providing Kaken’s drugs to medical professionals in the field. for export clears current Good Manufacturing Practice (cGMP) regulations in the United States, which were formulated the The Quality Assurance Department assesses whether each drug is produced according to those judgments every time and Food and Drug Administration (FDA). whether the quality test results comply with standards. The Pharmacovigilance Department then evaluates the safety within the facilities, aiming to enhance product quality and information collected so far from medical institutions pertaining research pharmaceutically useful innovations. to the drug in question, after which the Regulatory Affairs We have also set up Production Technology Laboratories Division judgments are comprehensively carried out. Marketing and Sales Division Kaken’s medical representatives (MRs) provide professionals on The Quality Assurance Department therefore works to maintain quality by regularly inspecting internal and external the medical front line with up-to-date information on the plants and collecting and examining information on quality. Company’s drugs and medical devices. Our MRs also talk with Meanwhile, the Pharmacovigilance Department reports the healthcare professionals to gather medical information related to assessed safety information to the required entities and the safety and effectiveness of our drugs and provide feedback to distributes information to medical institutions on the the relevant departments. We have established nine branches appropriate use of pharmaceuticals to enhance their and 68 sub-branches so that our 700 MRs can work closely with effectiveness, such as by incorporating this information in the local communities, particularly in our specialist fields of drug documentation. orthopedics and dermatology. The Regulatory Affairs Department supervises and assists with general aspects of production and marketing. Separate Distribution Division from these matters, the department is also involved in drug We outsource all distribution center functions to distributors R&D affairs. It compiles basic and clinical data produced in the specialized in handling pharmaceuticals. 11 Fulfilling Our Social Responsibilities Corporate Governance element of corporate governance, we believe our Board of Kaken recognizes that corporate governance is one of the Directors, corporate auditor system and operating officer most important issues facing management with regard to system—under the current management format for now— continually enhancing corporate value. Through the imple- are critical to the functional operation of the Company. mentation of appropriate systems, we have steadily raised the transparency of management, clarifying the separation of Our Initiatives management’s supervisory and business execution functions. Kaken is aware that compliance is pivotal to earning the trust In addition, we are fulfilling our obligation to provide stake- of society. To this end, we have established activity principles holders with appropriate information. and guidelines and adhere to high ethical standards in all of our business activities. The Company’s businesses are directly We have introduced an operating officer system to expedite decision-making and clarify supervisory and busi- concerned with people’s health and lives. In carrying out ness execution functions. these important activities, each executive and employee maintains a strong daily commitment to these activity princi Between the “company with corporate auditors” and “company with committees” formats for Kaken’s manage- ples and guidelines. ment, we have chosen our existing format of “company with corporate auditors.” While we fully recognize that reinforc- internal control systems, pursuant to the Company Law, based ing the control and auditing functions is an important on a resolution of the Board of Directors on May 12, 2006. Moreover, we maintain and operate a basic policy on Corporate Governance System General Meeting of Stockholders Board of Corporate Auditors Corporate Auditors Board of Directors Accounting Auditor President Internal Auditing Office Managing Directors Meeting Executive Directors Operating Officers, Companywide Departments, Group Companies 12 Compliance Environmental Protection Activities Kaken recognizes compliance-based management as the most Our corporate philosophy is that “By serving as many people fundamental element in gaining society’s trust and achieving as possible to return smiles of happiness to their faces, healthy development. We further believe that this will enable through supplying superior pharmaceuticals, Kaken helps the Company to raise its corporate value for the benefit of improve the quality of life for patients.” Based on this credo, our shareholders, investors, business partners and the local we are contributing to the health and lives of people through community. our pharmaceutical operations. The importance of environmental conservation has Kaken’s Activity Principles grown over recent years. Recognizing that environmental Every executive and employee of Kaken and its subsidiaries is protection and improvement are pressing issues for corpora- strongly committed to compliance in operations with respect tions, too, we are striving to fulfill our corporate philosophy to observing Japanese and foreign laws and regulations, through environmental preservation—to realize a society full respecting different cultures and customs and adopting high of healthy, smiling faces—and to promote social contribu- ethical standards. tion activities as a good corporate citizen. 1. We recognize the preciousness of life and shall contribute Kaken launched its environmental campaign in 1983, to the welfare of society by channeling all our efforts into with the objectives of maintaining and preserving people’s enhancing people’s health and patients’ quality of life. health and living conditions and responding to general 2. We recognize the importance of maintaining appropriate pollution issues, through the establishment of Environmental relations with all our stakeholders, including shareholders, Measure Committees and startup of activities at each opera- investors, employees, business partners and local com- tional site. Further, in 2004, we formulated basic principles munities. and basic policies related to environmental issues. In re- 3. We shall compete in a fair and free manner, conducting our business activities in a just and proper way. 4. We shall handle all the Company’s assets, including sponse to the April 2009 revision of the Act on the Rational Use of Energy, we recast our Environmental Measures Committees into an Environmental Measures Task Force. information, in a legitimate and proper manner to facili- This organization will work in tandem with the Environmen- tate the smooth running of its operations. tal Committee to develop companywide activities centered 5. We shall respect the human rights and individuality of on environmental preservation. employees, pay attention to health and safety issues and work hard to foster a fair and honest workplace culture. agement activities, with our Shizuoka production and R&D 6. We shall manage Company information appropriately and Thereafter, we have fortified our environmental man- facilities obtaining ISO14001 certification in August 2001 disclose information in a timely and appropriate manner. and our Kyoto research laboratories being awarded Kyoto 7. We shall take seriously the impact of our activities on the Environmental System (KES) certification in April 2005. global environment and contribute to society as a good corporate citizen, including through environmental pany’s headquarters and branches, will actively promote protection efforts. environmental management and social contribution activities 8. We shall not tolerate terrorism and other anti-social behavior. In the future, all of our worksites, spanning the Com- to expand and strengthen our fight against environmental problems. Further, we are striving to reduce the environmental burden of our business activities on the environment. 13 Board of Directors and Corporate Auditors (Standing, from left) Hirokazu Konishi, Takao Endo, Masao Ishida (Seated, from left) Susumu Kojima, Shuji Komoto, Shiro Inui, Takeshi Hirahara, Tetsuo Onuma President and Representative Director Executive Director Auditor Shiro Inui Masao Ishida Takeji Saito (Global Business Development) (Standing) Takeshi Hirahara Executive Director Auditor (Administration) Takao Endo Fumio Hoshii (General Affairs) (Standing) Shuji Komoto Executive Director Auditor (Accounting, Purchasing and Hirokazu Konishi Sumio Yoshizawa Agrochemicals) (Marketing Planning & Coordination) Executive Managing Director Executive Managing Director Auditor Executive Managing Director Tetsuo Onuma (Marketing and Sales) Executive Managing Director Susumu Kojima (Research and Development) 14 Keizo Nemoto Financial Section Consolidated Five-Year Summary 16 Management Discussion and Analysis 16 Consolidated Balance Sheets 18 Consolidated Statements of Income 20 Consolidated Statements of Changes in Net Assets 21 Consolidated Statements of Cash Flows 23 Notes to the Consolidated Financial Statements 24 Report of Independent Auditors 34 15 Consolidated Five-Year Summary Thousands of U.S. dollars (Note) Millions of yen 2009 2008 2007 2006 2005 2009 ¥82,930 10,629 5,579 ¥79,934 9,842 5,106 ¥76,415 8,113 4,602 ¥75,540 8,359 3,886 ¥74,922 7,897 3,417 $846,224 108,459 56,929 56,679 94,504 57,447 93,856 60,433 100,900 54,637 98,739 45,490 108,547 578,357 964,327 For the years ended March 31: Net sales Operating income Net income At March 31: Total net assets Total assets Per share data: Net income (Basic) Cash dividends (Non-Consolidated) 55.61 26.00 48.35 20.00 Ratios: ROE Capital adequacy ratio U.S. dollars (Note) Yen 42.42 17.00 ¥40.23 15.00 ¥36.54 12.00 7.76 55.33 7.71 41.91 $0.567 0.265 (%) 9.78 59.98 8.66 61.21 8.00 59.89 Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥98 = $1 effective on March 31, 2009. Management Discussion and Analysis Business Climate During the year, the Japanese economy went into recession, although its impact on the pharmaceutical industry was relatively slight. At the same time, government-induced measures to limit medical costs went into effect in April 2008, through efforts such as encouraging medical institutions and pharmacies to promote the use of generic drugs, and the number of medical facilities adopting the diagnosis procedure combination (DPC) payment system for medical treatment doubled. Under these circumstances, the Group strove to promote sales activities closely tied to local communities by providing high-value-added information that meets the needs of medical professionals in the field. Performance Consolidated net sales for the year under review amounted to ¥82,930 million, up 3.7% from the preceding fiscal year. Operating income rose 8.0%, to ¥10,629 million, as we raised the operating margin through more efficient use of selling, 16 general and administrative expenses. Net income climbed 9.3%, to ¥5,579 million, even though the Company posted a loss on devaluation of investment securities. Segment Information Pharmaceuticals Our pharmaceuticals segment consists of two core categories: pharmaceuticals and medical devices, and agrochemicals. In pharmaceuticals, sales of Artz—an anti-osteoarthritic and one of our mainstay products—grew. In medical devices, sales of the anti-adhesive absorbent barrier Seprafilm expanded steadily. Sales rose for the anti-hyperlipidemia treatment Lipidil, our wound healing agent Fiblast Spray and generic drugs. However, sales of Procylin—a treatment for chronic artery occlusive disease—fell, as did sales of the pain- and inflammation-relieving plaster Adofeed and related products. In agrochemicals, sales of Polyoxin fungicides—used to control fungal diseases on fruit trees, vegetables and lawns—and the rice herbicide Pentoxazone increased. On the other hand, Real Estate (2) Risks related to occurrence of side effects Clinical trials undertaken in the development stage involve the trial administration of drugs to a restricted number of patients. Consequently, once a drug is launched into the market we conduct post-marketing surveillance to supplement clinical trials. In the event a new side effect is discovered at this stage, sales of the drug could be halted. Rental income from Bunkyo Green Court represents the bulk of revenues from our real estate business. The completion of a sports facility at Bunkyo Green Court prompted an increase in this income during the year under review. Consequently, sales in the real estate segment rose 4.0%, to ¥2,481 million, and operating income increased 6.9%, to ¥1,481 million. (3) Risks related to policies to curtail medical expenses As government initiatives to curtail medical expenses, such medical system reforms as the establishment of a medical care system for elderly patients and changes in prescription forms are under consideration. Such changes in the market environment could affect the Company’s performance. sales of feed additives Salinomycin and Colistan sulfate decreased. As a result, net sales rose 3.7% year on year, to ¥80,448 million, and operating income grew 8.2%, to ¥9,147 million. Net sales overseas reached ¥3,840 million. Financial Position Total assets at fiscal year-end stood at ¥94,504 million, up ¥647 million from a year earlier. This growth was mainly the result of an increase in cash on hand and at banks. Total liabilities amounted to ¥37,825 million, up ¥1,416 million, primarily as a result of a rise in accounts payable related to capital expenditure. Net assets totaled ¥56,679 million, a decrease of ¥768 million, due mainly to the acquisition of treasury stock. Cash Flows Cash and cash equivalents at the end of fiscal year 2008 stood at ¥12,556 million, up ¥170 million from a year earlier. Principal factors related to cash flow during the year are described below. Net cash provided by operating activities amounted to ¥8,472 million, down ¥1,542 million. Contributing factors included an increase in notes and accounts receivable–trade. Net cash used in investing activities totaled ¥2,571 million. The principal use of cash was for the acquisition of property, plant and equipment. Net cash used in financing activities was ¥5,730 million. This was mainly the result of cash dividends paid and the acquisition of treasury stock. (4) Risks due to competition Sales competition with other pharmaceutical companies may result in a drop in prices. In addition, sales of generic products by other companies causes a decline in sales of the original product, which could affect the Company’s per formance. (5) Risks related to delay or cessation of production Production may be delayed or halted as a result of various factors, such as problems with manufacturing facilities or delays in the procurement of raw materials. These factors could affect the Company’s performance. (6) Risks related to legal action We are exposed to the possibility of legal action in the course of our business activities. Such actions could affect the Company’s performance. Risk Factors The factors outlined in the list below may materially affect investors’ decisions relating to the Company’s business activities. It should be noted that not all risks are included in the list. (1) Risks related to new drug development Substantial investment and development periods are required before a new drug is released onto the market. While undertaking development with due regard to verifying the efficacy and safety of a particular drug, development could be halted midway. 17 Consolidated Balance Sheets Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries. As of March 31, 2009 and 2008 Thousands of U.S. dollars (Note 4) Millions of yen ASSETS Current Assets: Cash on hand and at banks (Note 5) 2009 2008 ¥10,155 ¥ 8,288 $103,622 2,401 4,097 24,500 28,347 28,043 289,255 996 971 10,163 29,344 29,014 299,429 (7) (6) (71) 29,336 29,007 299,347 10,946 9,938 111,694 1,319 1,192 13,459 771 678 7,867 54,931 53,203 560,520 Buildings and structures 36,485 35,543 372,296 Machinery and equipment 19,476 18,851 198,735 55,962 54,395 571,041 (34,754) (33,150) (354,633) 21,207 21,244 216,398 3,762 3,362 38,388 925 543 9,439 25,895 25,151 264,235 5,042 7,733 51,449 657 792 6,704 Deferred tax assets (Note 14) 5,276 4,221 53,837 Other assets 2,699 2,755 27,541 13,677 15,502 139,561 ¥94,504 ¥93,856 $964,327 Marketable securities (Notes 5 and 6) 2009 Receivables: Notes and accounts receivable–trade Accounts receivable–other Less: Allowance for doubtful receivables Inventories (Note 7) Deferred tax assets (Note 14) Other current assets Total current assets Property, Plant and Equipment (Note 8): Less: Accumulated depreciation Land Construction in progress Total property, plant and equipment Investments and Other Assets: Investment securities (Notes 6 and 8) Intangible assets and long-term prepaid expenses Total investments and other assets TOTAL ASSETS The accompanying notes are an integral part of the Consolidated Financial Statements. 18 Thousands of U.S. dollars (Note 4) Millions of yen LIABILITIES AND NET ASSETS Current Liabilities: Short-term bank loans (Note 8) Current portion of long-term debts (Note 8) Payables: Notes and accounts payable–trade Notes and accounts payable–construction Accounts payable–other Accrued expenses Accrued bonuses Accrued sales rebates Accrued income taxes (Note 14) Other current liabilities Total current liabilities Non-Current Liabilities: Accrued pension and severance costs (Note 11) Accrued retirement benefits to directors Deferred tax liabilities (Note 14) Other long-term liabilities Total non-current liabilities Net Assets: Shareholders’ Equity (Notes 2 (l) and 12): Common stock - no par value Authorized: 360,000,000 shares Issued: 101,879,461 shares as of March 31, 2009 and 114,879,461 shares as of March 31, 2008 Capital surplus Retained earnings Treasury stock, at cost: 3,695,041 shares in 2009 and 13,564,112 shares in 2008 Total shareholders’ equity Valuation and translation adjustments: Net unrealized gain on other securities, net of taxes (Note 2 (c)) Deferred gain on hedges Total valuation and translation adjustments Total net assets TOTAL LIABILITIES AND NET ASSETS 2009 2008 2009 ¥ 7,910 — ¥ 5,380 3,000 $ 80,714 — 13,172 431 4,242 17,846 648 1,222 485 2,564 561 31,237 13,380 327 3,318 17,026 616 1,215 466 2,092 484 30,282 134,408 4,398 43,286 182,102 6,612 12,469 4,949 26,163 5,724 318,745 5,598 357 200 431 6,588 5,100 303 210 511 6,125 57,122 3,643 2,041 4,398 67,224 23,853 23,853 243,398 11,587 24,698 (3,417) 56,722 22,727 21,440 (11,618) 56,403 118,235 252,020 (34,867) 578,796 (43) — (43) 56,679 ¥94,504 1,045 (0) 1,044 57,447 ¥93,856 (439) — (439) 578,357 $964,327 The accompanying notes are an integral part of the Consolidated Financial Statements. 19 Consolidated Statements of Income Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries. For the years ended March 31, 2009 and 2008 Thousands of U.S. dollars (Note 4) Millions of yen Net sales Cost of sales Gross profit Selling, general and administrative expenses (Note 13) Operating income Other income (expenses): Interest and dividend income Interest expenses Amortization of net obligation at transition Gain on sales of property, plant and equipment, net Loss on disposal of property, plant and equipment Gain (loss) on sales of investment securities, net Loss on devaluation of investment securities Loss on disposal of inventories Revaluation loss of golf membership Other, net Income before income taxes Income taxes (Note 14): Current Deferred Net income Per share data: Net income (Note 16): Basic Diluted Cash dividends applicable to the year (Note 12) The accompanying notes are an integral part of the Consolidated Financial Statements. 20 2009 2008 2009 ¥82,930 43,144 39,786 ¥79,934 41,236 38,697 $846,224 440,245 405,980 29,156 10,629 28,855 9,842 297,510 108,459 161 (130) (524) 0 (80) (403) (398) — (56) 157 (1,275) 158 (145) (524) 448 (136) 48 (209) (896) (0) 20 (1,239) 1,643 (1,327) (5,347) 0 (816) (4,112) (4,061) — (571) 1,602 (13,010) 9,354 8,603 95,449 4,221 (446) 3,774 3,496 1 3,497 43,071 (4,551) 38,510 ¥ 5,579 ¥ 5,106 $56,929 U.S. dollars (Note 4) Yen ¥55.61 — ¥48.35 ¥48.11 $0.567 — ¥26.00 ¥20.00 $0.265 Consolidated Statements of Changes in Net Assets Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries. For the years ended March 31, 2009 and 2008 Thousands of U.S. dollars (Note 4) Millions of yen Shareholders' equity Common stock Balance at beginning of the year Changes during the year: Shares issued on conversion of convertible bonds Total changes during the year Balance at end of the year Capital surplus Balance at beginning of the year Changes during the year: Shares issued on conversion of convertible bonds Treasury stock acquired Retirement of treasury stock Total changes during the year Balance at end of the year Retained earnings Balance at beginning of the year Changes during the year: Cash dividends Net income Total changes during the year Balance at end of the year Treasury stock Balance at beginning of the year Changes during the year: Treasury stock acquired Treasury stock sold Retirement of treasury stock Total changes during the year Balance at end of the year Total shareholders' equity Balance at beginning of the year Changes during the year: Shares issued on conversion of convertible bonds Cash dividends Net income Treasury stock acquired Treasury stock sold Retirement of treasury stock Total changes during the year Balance at end of the year 2009 2008 2009 ¥23,853 ¥23,348 $243,398 — — 23,853 504 504 23,853 — — 243,398 22,727 22,226 231,908 — 0 (11,141) (11,140) 11,587 501 (0) — 500 22,727 — 0 (113,684) (113,673) 118,235 21,440 18,305 218,776 (2,321) 5,579 3,258 24,698 (1,971) 5,106 3,135 21,440 (23,684) 56,929 33,245 252,020 (11,618) (5,771) (118,551) (2,966) 26 11,141 8,200 (3,417) (5,857) 10 — (5,847) (11,618) (30,265) 265 113,684 83,673 (34,867) 56,403 58,110 575,541 — (2,321) 5,579 (2,966) 27 — 319 ¥56,722 1,006 (1,971) 5,106 (5,857) 9 — (1,707) ¥56,403 — (23,684) 56,929 (30,265) 276 — 3,255 $578,796 21 Thousands of U.S. dollars (Note 4) Millions of yen 2009 Valuation and translation adjustments Net unrealized gain (loss) on other securities Balance at beginning of the year Net changes in items other than shareholders' equity Balance at end of the year Deferred gain on hedges Balance at beginning of the year Net changes in items other than shareholders' equity Balance at end of the year Total valuation and translation adjustment Balance at beginning of the year Net changes in items other than shareholders' equity Balance at end of the year Total net assets Balance at beginning of the year Changes during the year: Shares issued on conversion of convertible bonds Cash dividends Net income Treasury stock acquired Treasury stock sold Net changes in items other than shareholders' equity Total changes during the year Balance at end of the year The accompanying notes are an integral part of the Consolidated Financial Statements. 22 2009 2008 ¥ 1,045 (1,088) (43) 2,321 (1,276) 1,045 $ 10,663 (11,102) (439) (0) 0 — 1 (2) (0) (0) 0 — 1,044 (1,087) (43) 2,323 (1,278) 1,044 10,653 (11,092) (439) 57,447 60,433 586,194 — (2,321) 5,579 (2,966) 27 (1,087) (768) ¥56,679 1,006 (1,971) 5,106 (5,857) 9 (1,278) (2,985) ¥57,447 — (23,684) 56,929 (30,265) 276 (11,092) (7,837) $578,357 Consolidated Statements of Cash Flows Kaken Pharmaceutical Co., Ltd. and Consolidated Subsidiaries. For the years ended March 31, 2009 and 2008 Thousands of U.S. dollars (Note 4) Millions of yen Cash flows from operating activities: Income before income taxes Adjustments for: Depreciation Amortization of long-term prepaid expenses Accrual for pension and severance costs, less payments Interest and dividend income Interest expense Revaluation loss of golf membership Gain on sale of investment securities Loss on devaluation of investment securities Loss on disposals of property, plant and equipment Gain on sale of property, plant and equipment Decrease (Increase) in notes and accounts receivable–trade Decrease (Increase) in inventories Increase (Decrease) in notes and accounts payable–trade Other, net Subtotal Interest and dividends received Interest paid Income taxes paid, net Net cash provided by operating activities Cash flows from investing activities: Acquisition of property, plant and equipment Proceeds from sales of property, plant and equipment Acquisition of investment securities Proceeds from sales of investment securities Payment of long-term prepaid expenses Other, net Net cash used in investing activities Cash flows from financing activities: Proceeds from short-term loans Repayment of long-term debts Acquisition of treasury stock Cash dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (Note 5) 2009 2008 2009 ¥ 9,354 ¥ 8,603 $ 95,449 2,407 135 456 (161) 130 56 403 398 80 (0) (304) (1,008) (208) 451 12,192 162 (126) (3,755) 8,472 2,280 327 (244) (158) 145 0 (48) 209 136 (448) 6,586 (811) (1,766) (865) 13,948 155 (145) (3,943) 10,014 24,561 1,378 4,653 (1,643) 1,327 571 4,112 4,061 816 (0) (3,102) (10,286) (2,122) 4,602 124,408 1,653 (1,286) (38,316) 86,449 (2,577) 0 (457) 501 (47) 7 (2,571) (2,183) 528 (2) 348 (315) (100) (1,726) (26,296) 0 (4,663) 5,112 (480) 71 (26,235) 2,530 (3,000) (2,939) (2,320) (5,730) 170 12,386 ¥12,556 — — (5,848) (1,967) (7,815) 472 11,914 ¥12,386 25,816 (30,612) (29,990) (23,673) (58,469) 1,735 126,388 $128,122 The accompanying notes are an integral part of the Consolidated Financial Statements. 23 Notes to the Consolidated Financial Statements 1. Basis of Presenting Consolidated Financial Statements: The accompanying consolidated financial statements of KAKEN PHARMACEUTICAL CO., LTD. (the “Company”) and its consolidated subsidiaries (collectively the “Group”) are basically an English version of those which were prepared from accounts and records maintained by the Group and in accordance with accounting principles and practices generally accepted in Japan, which are different in certain respects from the application and disclosure requirements of International Financial Reporting Standards, and filed with the Director of Kanto Finance Bureau. Certain items presented in the consolidated financial statements have been reclassified for the convenience of readers outside Japan. The consolidated financial statements are not intended to present the consolidated financial position, results of operations and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan. As permitted by the Japanese Financial Instruments and Exchange Law, amounts of less than one million yen have been omitted. As a result, the totals shown in the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sum of the individual amounts. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in the accompanying consolidated financial statements. 2. Summary of Significant Accounting Policies: (a) Principles of Consolidation The Company had three subsidiaries as of March 31, 2009 and 2008. The consolidated financial statements include the accounts of the Company and all of its subsidiaries. The consolidated subsidiaries as of March 31, 2009 are as follows: KAKEN REALTY & SERVICE CO., LTD. KAKEN PHARMA CO., LTD. FUJIKA CORPORATION There was no affiliate which was accounted for by the equity method. All significant intercompany transactions, account balances and unrealized profits or losses among the Group have been eliminated in consolidation. (b) Cash and Cash Equivalents Cash and cash equivalents in the consolidated statements of cash flows are composed of cash on hand, bank deposits which are able to be withdrawn within three months and short-term investments with original maturity of three months or less and are considered to have minimal risk from market fluctuations. (c) Marketable and Investment Securities Securities are classified into one of the following four categories; (1) Trading, (2) Held-to-maturity debt, (3) shares in subsidiaries and affiliated, and (4) Other. Trading securities are recorded at market value with unrealized gains and losses recognized in the current year’s earnings. Debt securities that are expected to be held to maturity are carried at amortized cost. Shares in subsidiaries and affiliates are carried at cost. Other securities are expected to be sold in future and those whose fair values are readily determinable are carried at fair value and the related unrealized gains or losses, net of taxes, are included as a component of “Valuation and translation adjustments” under net assets. Other securities without market quotations are stated at cost, determined by the moving average method. (d) Inventories Inventories are stated at the lower of cost or net selling value, which is defined as the selling price less additional estimated manufacturing costs and estimated direct selling expenses. (e) Property, Plant and Equipment Depreciation is computed on the declining-balance method at rates based on the estimated useful lives of assets, except for buildings, structures, machinery and equipment for the Komagome office that are computed on the straight-line method. Furthermore, depreciation of buildings, except for ancillary facilities to buildings, acquired on and after April 1, 1998, is com- 24 puted using the straight-line method. The range of useful lives is from 3 years to 60 years for buildings and structures, and from 2 years to 8 years for machinery and equipment. Pursuant to an amendment to the Corporate Tax Law in 2008, the Group have reviewed useful lives of machinery and equipment of the Group and consequently changed the useful lives of certain assets effective the year ended March 31, 2009. The effect of this change on the income was immaterial. (f) Accounting for Impairment of Fixed Assets In accordance with the accounting standard for impairment of fixed assets, the Group review their fixed assets for impairment by grouping the assets in income generating units whenever there is any indication of a significant decline in the fair value against its book value based on an independent appraisal, and when the existence of any impairment for the group of the assets is identified, an impairment loss will be recognized and such amount is directly deducted from the related assets. (g) Pension and Retirement Benefits Employees who terminate employment are entitled, under most circumstances, to lump-sum payments or pension payments as described below, determined by reference to current basic rate of pay, length of service and conditions under which the termination occurs. The minimum payment is an amount based on voluntary retirement. In addition to the minimum payment based on voluntary retirement, employees receive additional benefits for retirement due to age limit, death or other defined reasons. The Company has a non-contributory defined benefit funded pension plan (entrusted) which covers 30% of the benefits payable under the existing retirement plan to employees. The accrued pension and severance costs represent the amount actuarially calculated projected benefit obligation less (1) the fair value of the plan assets, (2) unrecognized actuarial loss or gain, (3) the unrecognized transition amount arising from adopting the new standard and (4) unrecognized prior service cost. If the fair value of the plan assets exceeds the projected benefit obligations, prepaid pension and severance costs are recorded on the balance sheet. The transition amount is amortized on a straight-line basis over 15 years. Unrecognized actuarial loss or gain is amortized on a straight-line basis over 10 years from the next year in which they arise. Unrecognized prior service cost is amortized on a straight-line basis over 10 years from the year in which they arise. For the Company, prepaid pension and severance costs were recognized for a portion of the plan covered by the non-contributory pension plan assets and the accrued pension and severance costs were recognized for a portion of the plan not covered by the plan assets. Accrued retirement benefits to directors and statutory auditors is provided in an amount equivalent to the liability the relevant company would have been required to pay upon retirement at the balance sheet date, as prescribed by its internal rules. (h) Income Taxes Income taxes are determined using the asset and liability approach, where deferred tax assets and liabilities are recognized for temporary differences between the tax basis of assets and liabilities and their reported amount in the financial statements. (i) Consumption Taxes Consumption taxes withheld and consumption taxes paid are excluded from revenues and expenses in the accompanying consolidated statements of income. The net balance of consumption taxes withheld and consumption taxes paid is included in current liabilities of the consolidated balance sheet as of the end of the fiscal year. (j) Derivative Financial Instruments Derivative instruments, which include forward foreign exchange contracts and interest rate swap agreements, are used as a part of the Company’s risk management of foreign currency and interest rate risk exposures of its financial assets and liabilities. Foreign currency exchange forward contracts: The Company enters into forward foreign exchange contracts to limit exposure, affected by changes in foreign currency exchange rates, on accounts receivable and payable and cash flows generated from anticipated transactions denominated in foreign currencies. For forward foreign exchange contracts which are designated and are effective as hedges of such currency exchange rate risk on existing assets and liabilities, the Company adopted the accounting method whereby foreign currency denominated assets and liabilities are measured at the contract rate of the respective forward foreign exchange contracts. With respect to such contracts for anticipated transactions, the contracts are marked-to-market and the unrealized gains/losses are deferred in the balance sheet to be released to income when the exchange gains/losses on the hedged items or transactions are recognized. Interest rate swap agreements: The Company enters into interest rate swap agreements, in order to lower funding costs and limit the Company’s exposure in respect of the underlying financial instruments, resulting from adverse fluctuation in interest rates. The related interest differen- 25 tials paid or received under the interest rate swap agreements are recognized in interest expenses over the terms of the agreements. Derivative financial instruments have not been implemented by consolidated subsidiaries. (k) Appropriations of Retained Earnings Appropriations of retained earnings at each year end are reflected in the consolidated financial statements for the following year upon stockholders’ approval. (l) Shareholders’ Equity The Japanese companies are subject to the Corporate Law of Japan (“the Law”). The Law provided that an amount equal to 10% of the amount to be disbursed as distributions of capital surplus (other than the capital reserve) and retained earnings (other than the legal reserve) be transferred to the capital reserve and the legal reserve, respectively, until the sum of the capital reserve and legal reserve equals 25% of the stated capital. Such distributions can be made at any time by resolution of the shareholders or by the Board of Directors if certain conditions are met. The above mentioned legal reserve is included in retained earnings in the accompanying consolidated balance sheets. (m) Net Income and Dividends per Share Net income per share of common stock is based upon the weighted average number of shares of common stock outstanding during each financial year appropriately adjusted for subsequent free distribution of shares (stock splits), if applicable. Cash dividends per share shown for each year in the accompanying consolidated statements of income represent dividends approved or declared as applicable to the respective years. Diluted net income per share is computed, based on the assumption that the convertible bonds were fully converted into common stock on the date of issue or at the beginning of the respective years subsequent to the issue, with appropriate adjustments of related interest expense (net of taxes). 3. Change in Accounting Policies: (Accounting for Lease Transactions) On March 30, 2007, the Accounting Standards Board of Japan (ASBJ) issued ASBJ Statement No.13, “Accounting Standard for Lease Transactions”, which revised the previous accounting standard for lease transactions issued in June 1993. Under the previous accounting standard, finance leases that are deemed to transfer ownership of the leased assets to the lessee were to be capitalized. However, other finance leases which do not transfer ownership of the leased assets were permitted to be accounted for as operating lease transactions if certain “as if capitalized” information is disclosed in the note to the lessee’s financial statements. The revised accounting standard requires lessees that all finance lease transactions should be capitalized to recognize lease assets and lease obligations in the balance sheet. The Group adopted this accounting standard effective from April 1, 2008. There was no effect of this change on operating income and income before income taxes. 4. United States Dollar Amounts: The Group maintains its accounting records in yen. The dollar amounts included in the consolidated financial statements and notes thereto represent the arithmetical results of translating yen to dollars on the basis of ¥98=U.S.$1, the approximate rate of exchange at March 31, 2009. The inclusion of such dollar amounts is solely for convenience and is not intended to imply that yen amounts have been or could be converted, realized or settled in dollars at that or any other rate. 5. Cash and Cash Equivalents: Cash on hand and at banks and marketable securities are reconciled to cash and cash equivalents of consolidated statements of cash flows as follows: Millions of yen March 31 Cash on hand and at banks Marketable securities Marketable securities due in more than three months Cash and cash equivalents 26 2009 2008 ¥10,155 2,401 12,556 — ¥12,556 ¥ 8,288 4,097 12,386 — ¥12,386 Thousands of U.S. dollars (Note 4) 2009 $103,622 24,500 128,122 — $128,122 6. Marketable Securities and Investment Securities: The costs and aggregate market values of marketable and investment securities are as follows: Millions of yen Cost March 31 Other securities: Market value available Equity securities Other securities Market value not available Total Held-to-maturity debt securities: Market value Unrealized loss Cost Market value 2009 Unrealized gain 2008 ¥4,523 — 4,523 2,494 ¥7,017 ¥4,450 — 4,450 2,494 ¥6,944 ¥(72) — (72) — ¥(72) ¥5,398 — 5,398 672 ¥6,070 ¥7,160 — 7,160 672 ¥7,832 ¥1,762 — 1,762 — ¥1,762 ¥ 500 ¥ 500 — ¥3,997 ¥3,997 — Thousands of U.S. dollars (Note 4) Cost March 31 Other securities: Market value available Equity securities Other securities Market value not available Total Held-to-maturity debt securities: Market value Unrealized loss 2009 $46,153 — 46,153 25,449 $71,602 $45,408 — 45,408 25,449 $70,857 $(735) — (735) — $(735) $ 5,102 $ 5,102 — Other securities sold during the fiscal years ended March 31, 2009 and 2008 are as follows: Thousands of U.S. dollars (Note 4) Millions of yen 2009 Proceeds from sales Gross realized gains Gross realized losses 2008 ¥501 32 436 ¥348 48 — 2009 ¥5,112 327 4,449 7. Inventories: Inventories as of March 31, 2009 and 2008 are comprised of the following: Thousands of U.S. dollars (Note 4) Millions of yen March 31 Finished products Work in process Raw materials and supplies Total 2009 ¥ 5,670 1,676 3,599 ¥10,946 2008 ¥4,599 1,692 3,646 ¥9,938 2009 $ 57,857 17,102 36,724 $111,694 27 8. Short-term Bank Loans and Long-term Debts: Short-term bank loans outstanding as of March 31, 2009 and 2008 represented the notes issued by the Group to banks. Customarily, these notes are renewed at maturity subject to renegotiation of interest rates and other factors. The weighted-average interest rates applicable to short-term bank loans as of March 31, 2009 and 2008 are 1.19% and 1.50%, respectively. Outstanding balance of short-term bank loans as of March 31, 2009 and 2008 were ¥7,910 million ($80,714 thousand) and ¥5,380 million, respectively. Long-term debts as of March 31, 2009 and 2008 consisted of the following: Thousands of U.S. dollars (Note 4) Millions of yen March 31 Loans from banks and other financial institutions due on September 30, 2008 (interest rate 1.77%) Less: current portion Total 2009 2008 2009 ¥— ¥3,000 $— — ¥— (3,000) ¥ — — $— As is customary in Japan, short-term and long-term bank loans are made under general agreements which provide that security and guarantees for future and present indebtedness will be given upon request of the bank, and that the bank shall have the right, as the obligations become due or in the event of their default, to offset cash deposits against such obligations due to the bank. The Group has not received any such requests to date. At March 31, 2009 and 2008, assets pledged as collateral for certain short-term and long-term debts, including current portion of long-term debts, are as follows: Thousands of U.S. dollars (Note 4) Millions of yen March 31 Assets pledged: Buildings and structures Machinery and equipment Land Investment securities Total Liabilities secured: Short-term bank loans Total 2009 2008 2009 ¥2,279 2,556 103 — ¥4,938 ¥2,227 2,539 103 1,708 ¥6,578 $23,255 26,082 1,051 — $50,388 ¥1,400 ¥1,400 ¥1,400 ¥1,400 $14,286 $14,286 9. Accounting for leases: As discussed in Note 3, the Companies adopted the revised accounting standard for lease transactions effective from April 1, 2008. Prior to April 1, 2008, under the previous accounting standard, finance leases which do not transfer ownership to the lessee were accounted for as operating lease transactions. Assumed data “as if capitalized” as to acquisition cost, accumulated depreciation, net book value and depreciation expense of the leased assets, which excluded the portion of interest thereon, for the year ended March 31, 2008 were summarized as follows: March 31, 2008 Acquisition cost Accumulated depreciation Net book value Depreciation Depreciation is computed on the straight-line method over the lease term of the leased assets with no residual value. 28 Millions of yen ¥15 15 — ¥ 0 Periodic lease expenses on finance lease contracts without ownership-transfer for the years ended March 31, 2008 was ¥1 million. Operating leases Future lease payments under non-cancellable operating leases at March 31, 2009 are as follows; March 31, 2009 Due within 1 year Due after 1 year Total Millions of yen Thousands of U.S. dollars (Note 4) ¥ 86 1,562 ¥1,648 $ 878 15,939 $16,816 10. Derivative Financial Instruments: Derivative financial instruments are utilized by the Company principally to reduce interest rate and foreign exchange rate risks. The Company has established a control environment which includes policies and procedures for risk assessments and for the approval, reporting and monitoring of transactions involving derivative financial instruments. The Company does not hold or issue derivative financial instruments for speculative purposes. The Company is exposed to certain market risks arising from its forward foreign exchange contracts and interest rate swap agreements. The Company is also exposed to the risk of credit loss in the event of non-performance by the counterparties to the currency and interest rate derivatives; however, the Company does not anticipate non-performance by any of these counterparties all of whom are financial institutions with high credit ratings. 11. Pension and Retirement Benefits: The pension and retirement benefit obligation and plan assets, funded status and composition of amounts recorded in the consolidated balance sheets as of March 31, 2009 and 2008 are as follows: Thousands of U.S. dollars (Note 4) Millions of yen March 31 Projected benefit obligations Plan assets Funded status Unrecognized transition amount Unrecognized actuarial loss Unrecognized prior service cost Amounts recognized in the balance sheet consists of Prepaid pension cost Accrued pension and severance costs 2009 2008 ¥(21,406) 9,015 (12,390) 3,149 5,282 (88) (4,046) ¥(21,474) 10,738 (10,735) 3,674 3,580 (110) (3,590) $(218,429) 91,990 (126,429) 32,133 53,898 (898) (41,286) 2009 1,552 ¥ (5,598) 1,509 ¥ (5,100) 15,837 $ (57,122) The components of net pension and severance costs for the years ended March 31, 2009 and 2008 are as follows: Thousands of U.S. dollars (Note 4) Millions of yen 2009 Service cost Interest cost Expected return on plan assets Amortization of transition amount Amortization of actuarial loss Amortization of prior service cost Net pension expense ¥ 673 488 (306) 524 565 (22) ¥1,923 2008 ¥ 683 495 (452) 524 354 (22) ¥1,584 2009 $ 6,867 4,980 (3,122) 5,347 5,765 (224) $19,622 29 Assumptions used in calculation of the above information for the year ended March 31, 2009 are as follows: Discount rate 2.3% Expected rate of return on plan assets 3.0% Method of attributing the projected benefits to periods of services Straight-line method 12. Shareholders’ Equity: a) Type and number of shares outstanding and treasury stock Type of shares outstanding Common stock Number of shares as of March 31, 2008 Increase in the number of shares during the accounting period ended March 31, 2009 Decrease in the number of shares during the accounting period ended March 31, 2009 Number of shares of March 31, 2009 114,879,461 — 13,000,000 101,879,461 Type of treasury stock Common stock 13,564,112 3,160,866 13,029,937 3,695,041 Notes: 1. Decrease in common stock (13,000,000 shares) is due to the retirement of treasury stock based on the resolution of the Board of Directors. 2. Increase in treasury stock (3,160,866 shares) is due to the purchase of treasury stock (3,000,000 shares) and purchase of shares less than one unit (160,866 shares). 3. Decrease in treasury stock is due to the retirement of treasury stock (13,000,000 shares) based on the resolution of the Board of Directors and purchase request on shares less than one unit (29,937 shares). b) Matters related to dividends i) Dividend payment Approvals by the ordinary general meeting of shareholders held on June 27, 2008 were as follows: Dividends on common stock Total amount of dividends ¥1,013 million ($10,337 thousand) Dividends per share ¥10.00 Record date March 31, 2008 Effective date June 30, 2008 Approvals by the Board of Directors’ meeting held on November 6, 2008 were as follows: Dividends on common stock Total amount of dividends ¥1,308 million ($13,347 thousand) Dividends per share ¥13.00 Record date September 30, 2008 Effective date December 4, 2008 ii) Dividends whose record date is attributed to the accounting period ended March 31, 2009, but become effective after the said accounting period. The Company obtained the following approval at the general meeting of shareholders held on June 26, 2009: Dividends on common stock Total amount of dividends ¥1,276 million ($13,020 thousand) Dividends per share ¥13.00 Record date March 31, 2009 Effective date June 29, 2009 13. Research and Development Costs: Research and development costs included in selling, general and administrative expenses for the years ended March 31, 2009 and 2008 amounted to ¥7,696 million ($78,531 thousand) and ¥6,808 million, respectively. 30 14. Income Taxes: The Group is subject to several taxes based on income, which in the aggregate resulted in statutory tax rates of approximately 40.69% for the years ended March 31, 2009 and 2008. A reconciliation of the differences between the statutory tax rate and the effective tax rate for the years ended March 31, 2009 and 2008 is as follows: 2009 Statutory tax rate Increase (decrease) in taxes resulting from: Expenses not deductible for income tax purpose (ex. Entertainment expenses) Income not included for income tax purpose (ex. Dividend income) Inhabitant per capita taxes Tax credit for research expenses Other Effective tax rate 2008 40.69% 40.69% 4.55 (0.34) 0.92 (6.44) 0.97 40.35% 4.85 (0.23) 1.00 (5.93) 0.27 40.65% Significant components of deferred tax assets as of March 31, 2009 and 2008 are as follows: Millions of yen 2009 Deferred tax assets: Reserve for bonuses Reserve for sales rebates Loss of supplies Devaluation of financial instruments Amortization of R&D Amortization of long-term prepaid expenses Pension and severance costs Retirement benefits to directors Unrealized gain of property, plant and equipment Other Total Valuation allowance Deferred tax assets Deferred tax liabilities: Deferred gain on sales of property, plant and equipment Unrealized gain on other securities Other Deferred tax liabilities Deferred tax assets, net Thousands of U.S. dollars (Note 4) 2008 2009 ¥ 472 197 162 204 415 173 1,827 145 2,568 550 6,717 (44) 6,672 ¥ 470 189 131 103 285 282 1,638 123 2,568 434 6,227 (19) 6,207 $ 4,816 2,010 1,653 2,082 4,235 1,765 18,643 1,480 26,204 5,612 68,541 (449) 68,082 (274) — (3) (277) ¥6,395 (287) (717) (1) (1,005) ¥5,201 (2,796) — (31) (2,827) $65,255 15. Related Party Transactions: There is nothing to be noted according to the disclosure requirements in Japan for the year ended March 31, 2009. 31 16. Per Share Information: Per share information for the years ended March 31, 2009 and 2008 is as follows: U.S. dollars (Note 4) Yen Net assets per share Net income per share Diluted net income per share 2009 2008 ¥577.27 55.61 — ¥567.02 48.35 48.11 2009 $5.891 0.567 — Calculation for net income per share and diluted net income per share is as follows: Thousands of U.S. dollars (Note 4) Millions of yen For the years ended March 31, 2009 and 2008 Net income Net income attributable to common stock Adjustment to net income (Share data) Average number of share (thousand) Additional number of share (thousand) 2009 2008 2009 ¥5,579 5,579 — ¥5,106 5,106 — $56,929 56,929 — 100,340 — 105,608 515 — — 17. Segment Information: Information about operations in industry segments of the Group for the years ended March 31, 2009 and 2008 is as follows: Millions of yen Year ended March 31, 2009 I. Sales and operating income Outside customers Inter-segment Total Operating expenses Operating income II. Assets, depreciation and capital expenditure Assets Depreciation Capital expenditure 32 Pharmaceutical Real estate Total Elimination or Corporate Consolidated ¥80,448 — 80,448 71,301 ¥ 9,147 ¥ 2,481 306 2,787 1,305 ¥ 1,481 ¥82,930 306 83,236 72,607 ¥10,629 ¥ — (306) (306) (306) ¥ — ¥82,930 — 82,930 72,300 ¥10,629 ¥57,842 ¥ 1,850 ¥ 3,170 ¥15,919 ¥ 692 ¥ 25 ¥73,762 ¥ 2,542 ¥ 3,196 ¥20,742 ¥ — ¥ — ¥94,504 ¥ 2,542 ¥ 3,196 Millions of yen Year ended March 31, 2008 I. Sales and operating income Outside customers Inter-segment Total Operating expenses Operating income II. Assets, depreciation and capital expenditure Assets Depreciation Capital expenditure Year ended March 31, 2009 I. Sales and operating income Outside customers Inter-segment Total Operating expenses Operating income II. Assets, depreciation and capital expenditure Assets Depreciation Capital expenditure Pharmaceutical Real estate Total Elimination or Corporate Consolidated ¥77,547 — 77,547 69,090 ¥ 8,457 ¥ 2,386 305 2,691 1,306 ¥ 1,385 ¥79,934 305 80,239 70,396 ¥ 9,842 ¥ — (305) (305) (305) ¥ — ¥79,934 — 79,934 70,091 ¥ 9,842 ¥57,020 ¥ 1,939 ¥ 2,227 ¥16,508 ¥ 669 ¥ 436 ¥73,528 ¥ 2,608 ¥ 2,663 ¥20,328 ¥ — ¥ — ¥93,856 ¥ 2,608 ¥ 2,663 Pharmaceutical Real estate Total Thousands of U.S. dollars (Note 4) Elimination or Corporate Consolidated $820,898 — 820,898 727,561 $ 93,337 $ 25,316 3,122 28,439 13,316 $ 15,112 $846,224 3,122 849,347 740,888 $108,459 $ — (3,122) (3,122) (3,122) $ — $846,224 — 846,224 737,755 $108,459 $590,224 $ 18,878 $ 32,347 $162,439 $ 7,061 $ 255 $752,673 $ 25,939 $ 32,612 $211,653 $ — $ — $964,327 $ 25,939 $ 32,612 18. Subsequent Event: There was no significant subsequent event to be noted herein as of June 26, 2009. 33 Report of Independent Auditors To the Board of Directors KAKEN PHARMACEUTICAL CO., LTD. We have audited the accompanying consolidated balance sheets of KAKEN PHARMACEUTICAL CO., LTD. and its consolidated subsidiaries (collectively, the “Group”) as of March 31, 2009 and 2008, and the related consolidated statements of income, changes in net assets and cash flows for the years ended , all expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards, procedures and practices generally accepted and applied in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of March 31, 2009 and 2008, and the consolidated results of their operations and their cash flows for the years ended in conformity with accounting principles and practices generally accepted in Japan (See Note 1). The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader have been translated on the basis set forth in Note 4 to the accompanying consolidated financial statements. Hijiribashi Audit Corporation Tokyo, Japan June 26, 2009 34 Corporate Data (As of March 31, 2009) Corporate Philosophy Directory Bringing smiles to everyone Kaken helps improve the quality of life for patients. not only responds to changes in the times but also innovates and remakes itself. Looking to create new drugs that are competitive on the global market, we will build Kaken into a company that makes our employees proud by providing much-needed, high-quality pharmaceuticals. Kaken strives to advance to the 21st century as a company that maintains a strong presence and fulfills its obligations to society as a pharmaceutical company. Contents The origin of Kaken Pharmaceutical Co., Ltd. can be traced back to the President’s Message 02 Institute of Physical and Chemical Research (Riken), established in Developing New Products 04 1917. The Company started pharmaceutical business with full-scale Overview of Major Products 06 Commitment and Excellence 10 Fulfilling Our Social Responsibilities 12 Board of Directors and Corporate Auditors 14 Financial Section 15 Corporate Data 35 and drug development activities through merger and alliance. Kaken’s prestige has soared accordingly. While the Company has established strength in developing and selling pharmaceuticals for orthopedics, it is now expanding its involvement in other medical fields, such as dermatology. The Company contributes to improving people’s health by cultivating its own original technologies, engaging in joint development initiatives, introducing new technologies and acquiring marketing rights. As a fruit of its technology and product introduction, the Company has been since June 2001 marketing Fiblast Spray consisting of Trafermin, a recombinant form of human basic Fibroblast Growth Factor (bFGF) for the first time in the world, licensed from a U.S. bio-pharmaceutical company, Scios, in the area of regenerative medicine (wound healing medicine). patients. Incorporated We strive to create and offer March 1948that satisfy the effective drugs needs of patients and medical professionals. Paid-in Capital ¥23,853 million Global Business Development Executive Director & General Manager Masao Ishida Creating joy as Tel: 81-3-5977-5046 a company. Fax: 81-3-5977-5133 E-mail: [email protected] recognize our social To continue realizing our corporate philosophy of “bringing smiles to everyone,” it is essential that Kaken technologies in 1948, and since then broadened the scope of its business Founded Creating joy for March 1917 KAKEN to their faces, through supplying superior pharmaceuticals, development of penicillin and streptomycin based on Riken’s own Company Information REGISTERED HEAD OFFICE 28-8, Honkomagome 2-chome, Bunkyo-ku, Tokyo 113-8650, Japan Tel: 81-3-5977-5001 conducts business by Fax: 81-3-5977-5131 http://www.kaken.co.jp By serving as many people as possible to return smiles of happiness Profile Business Philosophy: Three Joys Main Branches Sapporo Branch Sendai Branch Tokyo-1 Branch Tokyo-2 Branch Nagoya Branch Osaka-1 Branch Osaka-2 Branch Consolidated Hiroshima Branch Fukuoka Branch Administration: 118 Sales & Marketing: 991 Production & Technology: 252 Research & Development: 293 Regulatory Affairs: 35 Financial Highlights Thousands of U.S. dollars (Note) Millions of yen 2008 2009 ¥82,930 ¥79,934 $846,224 Operating income Net Research income Laboratories Shizuoka Research Laboratories Kyoto At March 31,Research Laboratories Production Technology Laboratories Total net assets 10,629 9,842 108,459 5,579 5,106 56,929 56,679 57,447 578,357 TotalOverseas assets Office: Kaken New York Office Per share data: Avenue, 24th Floor, New York, NY10167 245 Park 1-212-372-8910 Net Tel: income (Basic) Fax: 1-212-372-8970 Cash dividends (Non-Consolidated) E-mail: [email protected] 94,504 93,856 964,327 For the years ended March 31, Plant Net Shizuoka sales Factory Ratios: This annual report contains forward-looking statements pertaining to the Company’s ROE information and trends. Actual results may differ from expectations due to unforeseen company with vitality and presence whose employees enjoy Employees (Non-Consolidated) and take pride in their work. 2009 Forward-Looking Statements business and prospects. These statements are based on current analysis of existing responsibility as a pharmaceutical company with a high ethical standard and society’s trust. Common Stock Creating joy for Authorized: 360,000,000 shares our employees. Issued: 101,879,461 shares (As of Aug. 31, 2009) Our objective to become a 14,281 (As of Mar. 31, 2009) Number of isShareholders: Capital adequacy ratio Yen U.S. dollars (Note) ¥ 55.61 ¥ 48.35 $ 0.567 26.00 20.00 0.265 9.78 8.66 — 59.98 61.21 — % risks and uncertainties. Note: U.S. dollar amounts are translated, for convenience only, at the rate of ¥98 = $1 effective on March 31, 2009. 35 Annual Report 2009 Year Ended March 31, 2009 Bringing Smiles to Everyone